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Generational Dynamics Web Log for 5-Sep-2008
Long-term negative market trends asserting themselves strongly

Web Log - September, 2008

Long-term negative market trends asserting themselves strongly

Stock and commodities prices plummet as worldwide foreclosures and recessions worsen.

Investors continue to say how puzzled they are that the stock market keeps falling. On Thursday, when the Wall Street indexes fell 3%, I heard one financial pundit say, "I can't understand why investors are so pessimistic. Productivity numbers are up."

These are people whom I like to describe as "believing that history always begins this morning."

On this web site, I look at the world from the point of view of systems dynamics through time. The world's political, social and financial trends all have to be looked at as worldwide systems changing through time. Those who look at only recent data might as well look at the thermometer to decide whether it's going to snow next winter.

It was in 2002 and 2003 that I began telling people, and posting on this web site, that we were entering a new 1930s style Great Depression, probably by the 2006-2007 time frame. It was last year in August that I wrote, "The nightmare is finally beginning."

Frankly, I had expected the fall to occur more rapidly. I hadn't counted on the super-aggressive actions by the Fed and central banks around the world to postpone the inevitable.

These central bankers have been congratulating themselves and each other for preventing a major collapse, but look at the Dow Jones Industrial Average for the past year:

DJIA, 5-Sep-2007 to 4-Sep-2008

DJIA, 5-Sep-2007 to 4-Sep-2008

Since the market peaked last year on October 9, the market has been falling almost steadily. Every time it spikes up a bit, the pundits say that the worst is over, and they're caught by surprise again when the downward trend occurs again.

As I've said many times, this MUST happen with 100% certainty, since the market is overpriced by a factor of over 200%, and has been substantially overpriced since 1995. By the Law of Mean Reversion, the market MUST fall to Dow 4000 or below, and stay there for years.

(For information on why the stock market is overpriced, see "How to compute the 'real value' of the stock market.")

Commodities falling

During the last year, we've seen many continuing trends. The foreclosure rate continues to climb, and home prices continue to fall. The asset writedowns by financial institutions continue unabated.

But there has been a significant change within the last couple of months: It appears that the commodities bubble is leaking, and may be close to crashing.

Prices of oil, gold and other commodities have been falling sharply. The Baltic Dry Index, which measures the demand for international shipments of dry goods (such as iron ore) has also been falling sharply.

Incidentally, blogger Michael "Mish" Shedlock has been receiving hate mail over his writings on gold. Shedlock's only a kid, and I wish him the best, but he's got a problem because he's been advising his readers to buy gold.

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What's coming next: Understanding the deflationary spiral: Why are the dollar and the yen getting stronger, while the euro is getting weaker?... (27-Oct-2008)

Roubini: The situation is "sheer panic," as hundreds of hedge funds are going bust: Policy makers may need to close markets for one or two weeks.... (24-Oct-2008)

There's never before been a day like this on Wall Street.: Possible exception: One of the days just before or after the 1929 crash.... (11-Oct-2008)

Ben Bernanke's Great Historic Experiment is at the brink: Desperation sets in as credit markets continue to seize up.... (25-Sep-2008)

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Another stunning and historic bailout: Fannie Mae and Freddie Mac: Giddy investors are popping the champagne corks.... (9-Sep-2008)

Long-term negative market trends asserting themselves strongly: Stock and commodities prices plummet as worldwide foreclosures and recessions worsen.... (5-Sep-2008)

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As commodities plummet worldwide, the meaning is unclear.: We speculate on some possibilities.... (11-Aug-2008)

Alan Greenspan calls this a "once in a century" liquidity crisis.: Says that the "big surprise" is the "impressive" American economy... (3-Aug-2008)

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Many other advisers and brokers are in the same situation. As I wrote several times in the past, if you're an economics expert, journalist, investment broker, mortgage lender, analyst, regulator, pundit or politician, then I suggest that you'd better have your underground bunker picked out, because people are going to be coming after you. And if you're an ordinary person who's embezzled or cheated, thinking nobody would bother to check, then things are going to change, and all your past actions will be scrutinized and audited.

The continuing deflationary spiral

As has been apparent for a long time now, the worldwide deflationary spiral is really gripping everything. There's less money in the world every day than there was the day before, and that decrease appears to be accelerating. Money is being pulled out of the stock markets, and now it's being pulled out of the commodity markets.

Banks are desperate for money. One bank, National City, is actually paying its customers $200 to close their home equity credit lines.

(Incidentally, you should avoid closing any sources of credit at this time, since it may be years before you can get new credit again.)

What's particularly significant is what's happening in China. The entire country of China has been in an economic bubble for the last few years, and it was only a matter of time before the bubble burst. I've often speculated China's bubble might burst after the end of the China Olympics games. Now that the games are over, that may well be happening.

We're still waiting for the epochal event -- the massive generational panic that will be remembered forever. This must occur at some point. The last one occurred in 1929, and the next one is overdue.

A generational crash is an elemental force of nature, like a tsunami.

There will be millions or even tens of millions of Boomers and Generation-Xers in countries around the world, never having seen anything like this before, and not having believed it was even possible, suddenly in a state of total mass panic, trying to sell all at once.

Computer systems will crash or will be clogged for hours, or perhaps even for a day or two. People who had hoped to get out just as the collapse is occurring will be totally screwed, and will lose everything. Brokers and other institutions will go bankrupt.

I've estimated that the probability of a major financial crisis (generational stock market panic and crash) in any given week from now on is about 3%. The probability of a crisis some time in the next 52 weeks is 75%, according to this estimate. (5-Sep-2008) Permanent Link
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Generational Dynamics Web Log for 5-Sep-2008 Long-term negative market trends asserting themselves strongly

Commodities falling

The continuing deflationary spiral

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Generational Dynamics Web Log for 5-Sep-2008
Long-term negative market trends asserting themselves strongly